HOW HEALTH CARE REFORM CAN WORK: PART 2

Part 2: The Emergence of Consumer Value

Despite its deep flaws, the new health reform law, ACA, has three aspects that make me optimistic about medical entrepreneurs being able to surmount the law’s barriers to create a consumer-dominated, market-based medical care system that will deliver high-quality, affordable medical care to everyone:

1.    The creation of consumer value
2.    The rise of high-value local health plans
3.    Effective disease prevention

This second of five installments discusses consumer value.

Medical Consumer Value
The word “value” appears more than 200 times in ACA. The law’s architects clearly liked it and felt that the bill should strive to achieve it. Too bad they never bothered to clearly define it. If they had, they could have created a much more direct approach to fixing our dysfunctional medical care system, and without all the counter-functional, top-down bureaucracies that will actually impede it and force medical costs higher than they need to be.

The definition of value for any product or service is simple: quality divided by price (V=Q/P). That is, the higher the quality and the lower the price of anything, the higher the resulting value to its consumer. Value is the basis for virtually everything we buy in our market economy, except for medical care. That’s why the vast majority of Americans obtain affordable, high-quality food, clothes, transportation, housing, and recreation from a market-based economic system that focuses on maximizing customer quality (e.g., functionality, appeal, ease of use, effectiveness) while minimizing price. A central problem with medical care is that consumers aren’t allowed to know either its quality or its price. ACA will help fix that, albeit perversely, by initially driving the price of health insurance even higher than it would have been without the law.

ACA increases costs and insurance premiums by imposing new benefit requirements, provider taxes, supplier fees, unlimited coverage ceilings, free preventive services, Cadillac taxes, loosened eligibility restrictions, and increased provider pressure to raise their prices to the privately insured. Inevitably, the only way the majority of individuals and employers will be able to afford insurance will be by selecting much higher out-of-pocket deductibles and coinsurance than now (i.e., “lower actuarial values” in health insurance parlance). That’s the only avenue left by ACA for people to moderate their premium increases, especially since the law does nothing to address persistently high medical inflation. With its allowances for maximum deductible/coinsurance limits of almost $6,000 per person and double that for families (plus inflation), ACA provides a lot of room for lower actuarial values (as low as 60% for its “bronze” plan) and, thus, premium reductions.

But how can higher insurance costs be a good thing? From the standpoint of the people who won’t have any money left for out-of-pocket costs after paying mandatory premiums, it’s a bad thing, and one that could have been avoided by the law (and needs to be changed ASAP). What is good, however, is that the shift to large out-of-pocket requirements will remove the medical payment responsibility from insurers and shift it to consumers for all but the most expensive medical bills. This will create something long missing from the medical consumption equation, consumer price sensitivity.

For several years, my family has had a high-deductible health plan that requires us to pay the first several thousand dollars of our medical expenses. Because most of our charges have fallen below the deductible, our insurance company has become largely irrelevant, except as a critical backstop against unaffordable and unforeseen medical events. As a result, whenever I schedule medical care, I always ask, “How much is this going to cost me?” But because I’m among the relatively small number of Americans having such policies, my providers have always been able to get away with answering, “I don’t know” (with an exception for my LASIK vision-correction surgery which is not covered by insurance). When I persist, they usually refer me to their billing departments where I’m treated like I just arrived in a disc-shaped interplanetary vehicle. After convincing them I’m serious, their answer is invariably something like, “We can show you the charge schedule we’ll use to bill your insurer, but we won’t know how much you have to pay until they (or their computers) tell us the actual total they will allow under our contract with them—even if you owe the entire amount.”

The problem, of course, is that doctors’ and hospitals’ “charges” are a fiction, amounting on average to about two and a half times what they actually expect to collect. Yes, it’s as absurd as it sounds, a vestigial practice that escalates billing and collection costs to as much as 31% of all medical spending. As a result, there is literally no such thing as “price” in medical care. And since none of us can find out in advance which providers would be willing to treat us for less, we can’t shop around for a better deal.

Now think about how that will change when the majority of private patients start demanding to know prices up front (people spending their own money tend to do that). Providers will have no choice but to figure out how to provide them, and it’s not a particularly difficult thing to do, since they routinely did it until about 25 years ago. And when they do, the absurd transaction costs will drop from 31% to something close to the 2-3% cost of a credit card transaction—quickly freeing up hundreds of billions of dollars for more useful purposes (like producing higher living standards, economic growth, and more jobs). But an even greater benefit will flow from innovative competition among doctors and hospitals as they are forced to figure out how to improve their generally miserable productivity and cut their massive waste, thus allowing them to offer lower prices that patients will be willing and able to pay. As that occurs, not only will consumers’ out-of-pocket costs drop, but so will their insurance premiums. And with something like 75% of all medical expenditures adding no patient value, there is a lot of room for lowering costs.

But consumers won’t stop at demanding just pricing information. They’re also going to insist on knowing the quality of the care they will be paying for. What good is a low price if it’s accompanied by the mediocre (or worse) care that is today’s unfortunate norm? The quality of medical care is as fundamentally measurable as that of any of the other products and services we buy. Thus, doctors and hospitals will have to measure it, reveal it, manage it, and improve it.

What makes this process so virtuous is that low price and high quality are anything but antagonistic toward each other. Indeed, manufacturers worldwide have known for decades that improving quality actually lowers costs by reducing waste, increasing productivity, requiring less rework, and yielding greater adherence to continually improving standards. The same thing works for medical care, which we’re learning from high-value providers like Mayo Clinic, Intermountain Health, New West Physicians, Cleveland Clinic, Seattle Children’s Hospital, and others.

The downside, if you can call it that, is that the process of medical value creation will be extremely disruptive to providers that believe they can manage health reform by merely tweaking existing business models that institutionalize today’s waste, mediocre quality, and excessive, ever increasing costs. But entrepreneurial, early-adopter doctors, hospitals, and others will develop new business and practice models to deliver continually improving patient value and to prosper in the process. They will become the exemplars for the rest to follow. Providers that fail to adopt such models will either face extinction or be absorbed by their more forward-thinking competitors.

The outcome for all Americans will be ever-increasing medical quality at prices and total costs that become increasingly affordable. But for this process to fully evolve, we need to appreciate the two other benefits to arise from health reform: the emergence of local, value-driven health plans (Part 3) and the opportunity for a realistic reduction in preventable diseases (Part 4).

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6 Responses to HOW HEALTH CARE REFORM CAN WORK: PART 2

  1. John Sweeney says:

    You’re so right. How can we get your take on this to the powers that be?

  2. Randy Dipner says:

    Pardon me for not being as optimistic on this subject as you are.

    First, I do not believe patients will ask about price any time soon. They are just too conditioned that doctors know best and they follow like sheep. I have been through the conversion from an HMO style health care system to a high deductible HSA system. When I made the decision it made total sense to me. Now four years later and many meetings with staff to educate and cajole, I still have folks that think this is just some kind of avoidance scheme on my part to make them pay for something that I should be paying.

    Second, doctors simply have no motivation to try to provide actual costs to their patients. Even if they did feel like it might be a good idea, they would have no way to do so. The price for a particular procedure is not the same for every patient. It depends on their insurance carrier and the deal they have struck with the doctor group. I have tried every method I can think of to get actual costs. It just isn’t possible.

    I truly hope I am wrong on this, but I’m afraid I’m not.

  3. Pingback: How Health Reform Can Work: Part 3 | Stephen S. S. Hyde On Health Care Reform Topics

  4. Pingback: HOW HEALTH REFORM CAN: PART 5 | Stephen S. S. Hyde On Health Care Reform Topics

  5. Monte says:

    Sorry Hyde – I know you want to sell books, and your what if’s are mostly correct but the trend line is going in the exact opposite direction. The system we are going to will shut out most entrepreneurs as we move toward DRG bundled payments for episodes of care. The complexity of the payment algorithms will make consumer driven health less likely as payment scenarios will become more complex. Providers will truly not be able to know what the breakdown of costs will be for any care scenario. In this way top performance providers who can treat with lower costs will bend the cost curve down and providers who cannot perform will cut corners to try and keep up. The R&D top line will also suffer as constraints are put on payments toward established care. Again entrepreneurs will not bode well with these constraints. After all of this fails they might again look at consumer driven health but not any time soon.

  6. Pingback: How Health Reform Can Work: Part 1 | Stephen S. S. Hyde On Health Care Reform Topics

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